Weekly Market Review - Insights | Affin Hwang Asset Management

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A Brief on Global & Local Markets, Investment Strategy.

Week in Review | 29 march - 2 april 2021

Global Markets Rise as US Unveils Infrastructure Stimulus

After a slow start to the week, global equities staged a strong jump as the US unveiled a blockbuster US$2 trillion proposed infrastructure stimulus plan last week. The S&P 500 index closed 1.1% higher as a strong US jobs report also lifted sentiment. In Asia, the Hong Kong Hang Seng index and the broader MSCI Asia ex-Japan index also climbed 2.1% respectively.

US President Joe Biden unveiled a more than US$2 trillion infrastructure package last Wednesday as his administration shifts its focus to bolstering the post-pandemic economy. According to Reuters, the plan includes roughly US$2 trillion in spending over eight years and would raise the corporate tax rate to 28.0% to fund it.

Biden called it a vision to create “the strongest, most resilient, innovative economy in the world” — and millions of “good-paying jobs” along the way. The White House said the tax hike, combined with measures designed to stop offshoring of profits, would fund the infrastructure plan within 15 years.

In terms of sector opportunities, the stimulus plan could lead to enhanced infrastructure spending that could benefit the electric vehicle (“EV”) space including Asian players. By spurring EV investments, we could see more charging stations and facilities that could translate to better scale and demand. Other beneficiaries could include companies in the US involved in transportation, utilities and construction as the stimulus plan allocates a portion of spending for building of schools and community colleges.

On the corporate tax hike, we do not expect any significant earnings dilution yet with sell-side analysts and corporate players still assessing the full impact. However, the base case scenario is a negative 3.0-4.0% EPS impact to S&P500, while the worst-case scenario is a negative 7.0% EPS impact in 2022. For Biden’s plan to come to fruition it would need to increase the corporate income tax to 28.0% from 21.0%, and a 21% minimum tax to be set on global corporate earnings. In any case, the details of the proposed bill have yet to be debated upon and approved.

With regards to portfolio action, we trimmed Hon Hai Precision Co Ltd given its significant capex in EV which could impact their margins temporarily until it reaches significant scale. As valuations are looking rich, we decided to pare down holdings in the Taiwanese manufacturing company.

We also trimmed Xiaomi given its aggressive plans to enter the EV market which is already seeing stiff competition in China. As a technology player which started as a IoT and smartphone player, Xiaomi’s foray into EV might impact its earning given the heavy capex involved.

We nibbled into Tencent and Alibaba as valuations turn attractive. We also added our position in tech giant Baidu for our portfolios. We initiated a new exposure in Tencent Music which has a strong growth runway given a booming ad business and still low average revenue per user (“ARPU”).

Updates on Malaysia

On the domestic front, the local market was weaker with the benchmark KLCI down 1.0% last week. The sell-down was mainly led by foreign investors who may have been busy undertaking their quarterly rebalancing. The outflows also coincided with an amendment in the Emergency Ordinance 2021 Act.

The new law gazetted will temporarily allow the Finance Ministry to approve additional spending of the federal government’s funds beyond the initial Budget without going through the usual route of seeking Parliament’s approval, during the nationwide Emergency in Malaysia.

Similarly, chief ministers of states in Malaysia will similarly be able to approve additional spending in state government funds beyond the initial budget without having to get approval of state legislative assemblies.

On corporate headlines, glove manufacturer Top Glove went afoul of US laws following alleged use of forced labour in its production. According to The Edge, the US Customs and Border Protection (“CBP”) said it has directed personnel at all US ports of entry to begin seizing disposable gloves produced by Top Glove.

The directive came after the CBP Office of Trade, in consultation with the Secretary of the Treasury, published a forced labour finding against disposable gloves produced by Top Glove. The glove market could see a flood of supply, though other glove players might stand to benefit. We have no glove holdings in our unit trust funds.

We continue to add onto our existing positions in reopening/recovery names as well as beneficiaries of US-China trade divergence. We trimmed Bursa as volumes fall and trading activities are expected to also slow down as we approach Ramadan. Cash levels range between 5.0-10.0% for our domestic funds.

Fixed Income Updates & Positioning

On a broader market basis, the Asian credit space enjoyed a relatively resilient week. The HY segment, in particular, saw credit spreads compressed by some 9 bps in the week while spreads for IG names in the region were unchanged.

Nevertheless, in terms of relative performance for 1Q2021, the Asian IG credit segment appears to be the cream of the crop; with spreads tightening by 20 bps since the start of the year to outperform its US counterpart. One of the main drivers for this outperformance is due to the shorter duration that was preferred amid the recent volatility in benchmark yield across the globe. The Asian IG index has a duration of about 5.8 years while US IG names have an average duration of more than 8.0 years.

In terms of primary action last week, we saw US$8.4 billion worth of new issuances entering the market as more issuers are looking to lock-in on current rates before they eventually trend higher (again) alongside the broad market recovery. Among which, AIA was among the notable few that entered the market with a Tier 2 note at 2.7%; in which the issuance was well supported. In addition, China property player, Jinmao Holdings was also seen tapping into the market last week.

On notable news flow, headlines continue to be dominated by the fiasco surrounding Yuzhou Group in the week. To recap, the Chinese property player first warned on 21 March 2021 that its earnings for 2020 should see a “significant” drop, and then revealed on 25 March 2021 that the company’s net profit for 2020 – based on preliminary and unaudited data – have declined by over 90.0% year-on-year to RMB170 million. The announcements saw Yuzhou’s credit rating downgraded to B1/Negative from Ba3/Stable by Moody’s Investors Service.

On 30 March 2021, Yuzhou confirmed its earnings results and further attributed the performance slump to stricter reporting and accounting standards. According to the company, its appointed auditor has ruled that some of its ongoing joint venture (“JV”) projects cannot be consolidated into the company’s profit and loss (“P&L”) statement for FY2020; and the revenue that were recognised for its P&L statement were mostly from projects of lower margin – hence the huge disparity as compared to FY2019.

Evidently, many have since criticised the company’s management style in terms of investor relations and communications. Nevertheless, looking past the background noise, we perceive the softness in earnings to be a one-off event. We expect Yuzhou recognise the JV project revenues on its P&L in tandem with the eventual completion and delivery of the JV projects. In addition, we believe that the company’s liquidity profile remains largely intact, where its cash to short-term debt ratio is about 2 to 1. The company also boast sizable and quality land banks across strategic locations in China.

Hence considering Yuzhou’s sturdy fundamentals and presence, we think that the sell-off was a tad overdone. While the company has seen its bonds beaten down by as much as 20 points across the curve since the first profit warning, we are beginning to see a recovery in some of its bonds. We have taken the opportunity to average down on some of our positions in Yuzhou bonds, especially on the shorter-end of the curve – that are due for maturity in 2023 and 2024 – given current attractive valuation, coupled with our optimistic view on the company’s medium- to long-term prospects. Nevertheless, we will be closely monitoring further developments and continually reassess the company moving forward.

In other news, China Huarong Asset Management – a majority state-owned financial asset management company that is focused on distressed debt management – also fell under pressure last week following a delay in the release of its earnings results; with credit spreads widening by as much as 100 bps in the week. Considering the company’s government ownership and strategic importance, the sell-off could present some opportunities in which we may look to nibble into for some of our Asian portfolios.

In any case, caution remains a key theme of ours as we look to focus more on names that are located on the higher end of the quality ladder. Currently, our Asian portfolios are still sitting on a cash level of approximately 8.0-10.0%.

Back home, the domestic bond market enjoyed continued buying interest in the week on the back of several key drivers including: (i) the stability seen in US treasury markets, (ii) Malaysia’s retention within the FTSE World Government Index, as well as (iii) more attractive yield levels. On a week-on-week basis, government bond yields declined by some 10 to 23 bps across the curve. The 10-year MGS benchmark ended the session 18 bps lower to 3.15%, while the 30-year MGS yield closed 23 bps lower to 4.2%.

On primary news flow, the government auctioned a new 20-year GII benchmark of RM4 billion in size last week; in which RM2 billion was allocated for private placement while the remaining RM2 billion was offered to the public. The auction garnered a healthy bid-to-cover ratio of more than 2.0x with an average yield of around 4.4%. Demand for the new benchmark in the secondary market picked-up and saw yields rallied by some 20 bps post-auction. As for the corporate segment, we saw Pelabuhan Tanjung Pelepas raising RM200 million in the primary market via its 5-year issuance at 3.74%.

In other news, FTSE Russell has announced that Malaysia will maintain its position within the FTSE World Government Index. In its FTSE Fixed Income Country Classification Announcement released on 29 March 2021, the index provider commended Bank Negara Malaysia (“BNM”) for its initiatives in enhancing the foreign exchange market structure as well as liquidity for the local bond market.

In terms of portfolio action, we traded some of our govvy positions amid the return in buying activities in the market. In addition, we have also taken profit on some of our corporate holdings and redeploying in the short- to medium-term corporate names that we are comfortable with. Considering that valuations are some 70 to 80 bps cheaper as compared to last year, we are taking this opportunity to the portfolio yield for our Malaysian funds. Nevertheless, we are still maintaining our cautious stance at this juncture, and we intend gradually trim our positions in longer-dated papers.

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